By Miles Clyne
A baby cries and a caring mother soothes and feeds her infant. We are taught to trust from the moment we come into the world. We also know that children trust negligent parents. As a species, we seem born to trust, despite human history filled with stories of our trust being abused.
What motivated this blog was an article in The Globe and Mail written by Rob Carrick, where he discussed a couple who spent hours with a financial planner at their bank, only to be left totally confused as to the right approach to dealing with their financial future.
Mr. Carrick states “This is what happens when people seek personalized financial planning from a place where the prime directive is to sell products.” He goes on to give some practical advice.
I agree with Mr. Carrick. I spent time at institutions where the compensation increased substantially if “company/proprietary” investment products were sold to clients. I was never forced to sell these products, but the financial incentive provided motivation to give them serious consideration regardless of whether there was value or not to clients. I believe these conflicts arise, not only in the area Mr. Carrick pointed out, but in many other areas of finance.
Many financial institutions give financial incentives in one form or another to encourage the sale of their own products, even if there are perceived and/or real conflict of interest with their clients. You would have to believe incentives work, or companies would have ceased to use them long ago.
I, like many people in the financial industry, have had to sign contracts forbidding the discussion of aspects of the employer’s business practices with anyone outside of the company. This is understandable for many good reasons and perhaps for some that are not so good. Consequently, you hear very little about subjects like this because incentives to sell company products can easily be confused with putting the firm’s bottom line ahead of the clients’ best interests.
I made a choice to leave or not work for the companies that offer these types of options for one primary reason. I never wanted my clients to have a moment of doubt as to why I recommended a product to them. Doubt is not a companion of trust.
There is a reasonable solution regarding working with organizations to help ensure fairness. On all recommendations ask for full disclosure on the fees paid to your advisor. If you are being recommended proprietary products, ask if there is additional compensation being paid along with an explanation as to why they are recommending the product over a non proprietary option. In certain situations, it can be reasonable to use proprietary products.
Remember to get the above information in writing. There is nothing wrong with knowing all of the details up front in order to get the best results. In my opinion, always compare the appropriate options side by side and let the products speak for themselves.